I pay my foreign parent a percentage of sales for the right to use its patents, trade marks and know-how while our agreement runs. Is that revenue expenditure or capital?
Revenue. The Supreme Court held the contributions paid by Ciba of India to its Swiss parent were allowable under section 10(2)(xv) of the 1922 Act. The assessee acquired merely the right to draw on the Swiss company's technical knowledge for a limited period in running its business; the Swiss company parted with no asset and the assessee acquired no asset or advantage of an enduring nature. The claim under the scientific research provision failed, because money paid to recoup another's research spending is not expenditure laid out by the assessee on research relating to its own business. A separate claim for a share of patent litigation costs also failed.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah, V. Ramaswami and Vishishtha Bhargava, JJ (judgment delivered by Shah, J)) on 1967-12-15, reported as 1968 AIR 1131; 1968 SCR (2) 696. It bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(2)(xii) of the Indian Income-tax Act, 1922, section 37(1), section 35 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the leading Indian authority on payments for know-how and licensed technology, and the six features the Court lists are the checklist practitioners still work through: a limited term, terminable early; the object being technical assistance for running the business; a licence subject to rights already granted or later granted to others; a bar on divulging the information; no once-for-all transfer of the fruits of research, the licensor continuing to research and to supply results; and a recurring payment measured by sales and lasting only as long as the agreement. It also disposes of the Revenue's favourite argument from Evans Medical Supplies, pointing out that the character of a receipt in the recipient's hands does not determine the character of the outgoing in the payer's, and that the House of Lords majority there rested on contradictory premises. And it draws the separate line for the research allowance: recoupment of somebody else's research is not your research spending.
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Ciba Ltd, Basle sold its products in India through a subsidiary, Ciba (India) Ltd. After the assessee was incorporated on 13 December 1947 the Indian activities were split: the assessee took over the pharmaceutical section from 1 January 1948 and the dyes and chemicals business stayed with the other subsidiary. By a deed of 17 December 1947 the Swiss company agreed to communicate to the assessee the results of its research on the relevant products, to deliver processes, formulae, scientific data, working rules and prescriptions, and to forward scientific and bibliographic material useful for promoting sales in India. It granted a licence over listed Indian patents and trade marks, expressly subject to licences already granted to third parties and to others it might grant later. The assessee was barred from divulging confidential information, from assigning the benefit of the agreement and from granting sub-licences without written consent. The agreement ran for five years from 1 January 1948, terminable on three months' notice for breach and immediately if the Swiss company had to part with its shares in the assessee; on termination the assessee had to stop using the patents and trade marks and return all material. The consideration was half-yearly contributions of ten per cent of net selling prices - five per cent for technical consultancy, service and research, three per cent for experimental raw material and two per cent as trade mark royalty - reduced to six per cent by a supplementary agreement of 15 July 1949. For 1949-50 to 1953-54 the payments were claimed under section 10(2)(xii). The Income-tax Officer allowed only the two per cent trade mark royalty; the Appellate Assistant Commissioner agreed; the Tribunal allowed the claim under section 10(2)(xii) and in any event under section 10(2)(xv). The Bombay High Court rejected the first and upheld the second. A separate claim, for reimbursing the Swiss company's share of costs in a patent infringement suit brought by May and Baker against Boots Drug Co., was rejected by the High Court.
Both sets of appeals were dismissed with costs, one hearing fee in each set, so the High Court's answers stood. On the research allowance, one condition of section 10(2)(xii) is that the expenditure be laid out or expended on scientific research by the assessee. Payment made to recoup another person for research expenditure incurred by that other person, even if it ultimately benefits the assessee, is not expenditure laid out on scientific research related to the assessee's business unless the research is carried on for or on behalf of the assessee. On the general deduction, the expenditure was not of a kind described in clauses (i) to (xiv), was laid out wholly and exclusively for the purposes of the business, and was not capital. The assessee did not become exclusively entitled even for the term of the agreement to the patents and trade marks; it had access to the Swiss company's technical knowledge and was a mere licensee of it for a limited period. On the litigation costs, the patents in the schedules did not include the May and Baker patents; those rights had not devolved on the assessee; the suit had been filed before the assessee was even registered, so in paying the share of costs it was not protecting its own trading interest; and it was not proved that the Swiss company's obligation had been transmitted through Ciba (India) Ltd to the assessee.
On the capital question the Court read the whole agreement and drew out six facts showing that the secret processes had not been sold: the licence was for five years and terminable earlier in certain events; its object was the benefit of technical assistance for running the business; it was subject to rights already granted to others or granted later; the assessee was forbidden to divulge confidential information; there was no once-for-all transfer of the fruits of research, the Swiss company continuing its research and agreeing to make it available; and the payment was recurrent, dependent on sales and confined to the term. The Revenue's reliance on Evans Medical Supplies was rejected on two grounds. The nature of a receipt as capital or revenue in the hands of the payee is not always determinative of the nature of the outgoing in the hands of the payer. And the majority speeches in that case rested on different and somewhat contradictory premises and lay down no principle of value here; as the House of Lords itself later explained in Rolls Royce and English Electric, Evans Medical turned on a total loss of the company's Burmese business through the communication of secret processes. In Rolls Royce, payments for licensing a foreign government to manufacture aero engines with the taxpayer's accumulated knowledge were revenue, and in English Electric lump sums for imparting manufacturing technique were income. Here the Swiss company had neither parted with its Indian business nor attempted to part with its technical knowledge absolutely.
by making that technical knowledge available the Swiss Company did not part with any asset of its business nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business
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Handle my notice → Ask a CA on WhatsAppRevenue. The Supreme Court held the contributions paid by Ciba of India to its Swiss parent were allowable under section 10(2)(xv) of the 1922 Act. The assessee acquired merely the right to draw on the Swiss company's technical knowledge for a limited period in running its business; the Swiss company parted with no asset and the assessee acquired no asset or advantage of an enduring nature. The claim under the scientific research provision failed, because money paid to recoup another's research spending is not expenditure laid out by the assessee on research relating to its own business. A separate claim for a share of patent litigation costs also failed. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah, V. Ramaswami and Vishishtha Bhargava, JJ (judgment delivered by Shah, J)) and bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(2)(xii) of the Indian Income-tax Act, 1922, section 37(1), section 35 of the Income Tax Act 1961. It is reported as 1968 AIR 1131; 1968 SCR (2) 696. This is the leading Indian authority on payments for know-how and licensed technology, and the six features the Court lists are the checklist practitioners still work through: a limited term, terminable early; the object being technical assistance for running the business; a licence subject to rights already granted or later granted to others; a bar on divulging the information; no once-for-all transfer of the fruits of research, the licensor continuing to research and to supply results; and a recurring payment measured by sales and lasting only as long as the agreement. It also disposes of the Revenue's favourite argument from Evans Medical Supplies, pointing out that the character of a receipt in the recipient's hands does not determine the character of the outgoing in the payer's, and that the House of Lords majority there rested on contradictory premises. And it draws the separate line for the research allowance: recoupment of somebody else's research is not your research spending. If it applies to you, the first step is this: Draft and keep the agreement so the six features are visible: fixed term, non-exclusive licence, confidentiality, no absolute transfer of know-how, return of material on termination, and payments running with sales for the term only.
Ciba Ltd, Basle sold its products in India through a subsidiary, Ciba (India) Ltd. After the assessee was incorporated on 13 December 1947 the Indian activities were split: the assessee took over the pharmaceutical section from 1 January 1948 and the dyes and chemicals business stayed with the other subsidiary. By a deed of 17 December 1947 the Swiss company agreed to communicate to the assessee the results of its research on the relevant products, to deliver processes, formulae, scientific data, working rules and prescriptions, and to forward scientific and bibliographic material useful for promoting sales in India. It granted a licence over listed Indian patents and trade marks, expressly subject to licences already granted to third parties and to others it might grant later. The assessee was barred from divulging confidential information, from assigning the benefit of the agreement and from granting sub-licences without written consent. The agreement ran for five years from 1 January 1948, terminable on three months' notice for breach and immediately if the Swiss company had to part with its shares in the assessee; on termination the assessee had to stop using the patents and trade marks and return all material. The consideration was half-yearly contributions of ten per cent of net selling prices - five per cent for technical consultancy, service and research, three per cent for experimental raw material and two per cent as trade mark royalty - reduced to six per cent by a supplementary agreement of 15 July 1949. For 1949-50 to 1953-54 the payments were claimed under section 10(2)(xii). The Income-tax Officer allowed only the two per cent trade mark royalty; the Appellate Assistant Commissioner agreed; the Tribunal allowed the claim under section 10(2)(xii) and in any event under section 10(2)(xv). The Bombay High Court rejected the first and upheld the second. A separate claim, for reimbursing the Swiss company's share of costs in a patent infringement suit brought by May and Baker against Boots Drug Co., was rejected by the High Court. The matter was decided on 1967-12-15 by the Supreme Court (Supreme Court of India - J.C. Shah, V. Ramaswami and Vishishtha Bhargava, JJ (judgment delivered by Shah, J)). On those facts the Supreme Court held as follows. Both sets of appeals were dismissed with costs, one hearing fee in each set, so the High Court's answers stood. On the research allowance, one condition of section 10(2)(xii) is that the expenditure be laid out or expended on scientific research by the assessee. Payment made to recoup another person for research expenditure incurred by that other person, even if it ultimately benefits the assessee, is not expenditure laid out on scientific research related to the assessee's business unless the research is carried on for or on behalf of the assessee. On the general deduction, the expenditure was not of a kind described in clauses (i) to (xiv), was laid out wholly and exclusively for the purposes of the business, and was not capital. The assessee did not become exclusively entitled even for the term of the agreement to the patents and trade marks; it had access to the Swiss company's technical knowledge and was a mere licensee of it for a limited period. On the litigation costs, the patents in the schedules did not include the May and Baker patents; those rights had not devolved on the assessee; the suit had been filed before the assessee was even registered, so in paying the share of costs it was not protecting its own trading interest; and it was not proved that the Swiss company's obligation had been transmitted through Ciba (India) Ltd to the assessee.
On the capital question the Court read the whole agreement and drew out six facts showing that the secret processes had not been sold: the licence was for five years and terminable earlier in certain events; its object was the benefit of technical assistance for running the business; it was subject to rights already granted to others or granted later; the assessee was forbidden to divulge confidential information; there was no once-for-all transfer of the fruits of research, the Swiss company continuing its research and agreeing to make it available; and the payment was recurrent, dependent on sales and confined to the term. The Revenue's reliance on Evans Medical Supplies was rejected on two grounds. The nature of a receipt as capital or revenue in the hands of the payee is not always determinative of the nature of the outgoing in the hands of the payer. And the majority speeches in that case rested on different and somewhat contradictory premises and lay down no principle of value here; as the House of Lords itself later explained in Rolls Royce and English Electric, Evans Medical turned on a total loss of the company's Burmese business through the communication of secret processes. In Rolls Royce, payments for licensing a foreign government to manufacture aero engines with the taxpayer's accumulated knowledge were revenue, and in English Electric lump sums for imparting manufacturing technique were income. Here the Swiss company had neither parted with its Indian business nor attempted to part with its technical knowledge absolutely. In the words reproduced by the source cited on this page: "by making that technical knowledge available the Swiss Company did not part with any asset of its business nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business"
It was decided by the Supreme Court on 1967-12-15 and is reported as 1968 AIR 1131; 1968 SCR (2) 696. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(2)(xii) of the Indian Income-tax Act, 1922, section 37(1), section 35, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Both sets of appeals were dismissed with costs, one hearing fee in each set, so the High Court's answers stood. On the research allowance, one condition of section 10(2)(xii) is that the expenditure be laid out or expended on scientific research by the assessee. Payment made to recoup another person for research expenditure incurred by that other person, even if it ultimately benefits the assessee, is not expenditure laid out on scientific research related to the assessee's business unless the research is carried on for or on behalf of the assessee. On the general deduction, the expenditure was not of a kind described in clauses (i) to (xiv), was laid out wholly and exclusively for the purposes of the business, and was not capital. The assessee did not become exclusively entitled even for the term of the agreement to the patents and trade marks; it had access to the Swiss company's technical knowledge and was a mere licensee of it for a limited period. On the litigation costs, the patents in the schedules did not include the May and Baker patents; those rights had not devolved on the assessee; the suit had been filed before the assessee was even registered, so in paying the share of costs it was not protecting its own trading interest; and it was not proved that the Swiss company's obligation had been transmitted through Ciba (India) Ltd to the assessee. It arises in Deductions & Disallowances matters, on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(2)(xii) of the Indian Income-tax Act, 1922, section 37(1), section 35 of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah, V. Ramaswami and Vishishtha Bhargava, JJ (judgment delivered by Shah, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not claim recoupment of a group company's research spend under the scientific research provision; unless the research is carried on for or on behalf of you, it is not your expenditure on research. Answer the enduring benefit argument by asking what the licensor gave up - if it retains and continues to exploit the knowledge, you have acquired access, not an asset. Where you reimburse a group company for third party costs, be able to show the obligation was yours or devolved on you; the assessee lost that claim for want of any agreement or evidence of devolution, and because the suit predated its own incorporation.
Still good law. The leading authority on know-how and licence payments and constantly applied; the harvested page records it as referred to and relied on in Supreme Court decisions of 1987 and 1989. No later decision doubting it was read as part of this exercise. The 1961 Act now contains its own provisions on the treatment of know-how and on scientific research expenditure, none of which was before the Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act, 1922 on sections 10(2)(xii) and 10(2)(xv), with the reference under section 66(1); the batch line's section 37(1) of the 1961 Act is the corresponding general deduction and section 35 the corresponding research allowance, but neither was construed. The judgment does not decide how such a payment would be treated if the term were much longer, if the licence were exclusive, or if the payment were a lump sum, and it says in terms that the majority view in Evans Medical Supplies gives no principle to work with. The Court also recorded that the argument that the assessee was entitled to the May and Baker patent rights had not been advanced before the Tribunal or the departmental authorities, so no investigation of it was permissible. The harvested text refers at one point to schedules to an agreement dated 1 December 1949, where the agreement under consideration is dated 17 December 1947; the discrepancy is in the source and has not been resolved. The page carries a reporter's headnote before the judgment; it has been ignored. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both sets of appeals were dismissed with costs, one hearing fee in each set, so the High Court's answers stood. On the research allowance, one condition of section 10(2)(xii) is that the expenditure be laid out or expended on scientific research by the assessee. Payment made to recoup another person for research expenditure incurred by that other person, even if it ultimately benefits the assessee, is not expenditure laid out on scientific research related to the assessee's business unless the research is carried on for or on behalf of the assessee. On the general deduction, the expenditure was not of a kind described in clauses (i) to (xiv), was laid out wholly and exclusively for the purposes of the business, and was not capital. The assessee did not become exclusively entitled even for the term of the agreement to the patents and trade marks; it had access to the Swiss company's technical knowledge and was a mere licensee of it for a limited period. On the litigation costs, the patents in the schedules did not include the May and Baker patents; those rights had not devolved on the assessee; the suit had been filed before the assessee was even registered, so in paying the share of costs it was not protecting its own trading interest; and it was not proved that the Swiss company's obligation had been transmitted through Ciba (India) Ltd to the assessee.
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